EDU Articles

Establishing a money purchase/profit sharing plan is a crucial step for employers who wish to provide retirement benefits to their employees. These qualified plans require careful consideration, adherence to legal requirements, and the implementation of an effective investment strategy. In this article, we will explore the key steps involved in setting up a money purchase/profit sharing plan and highlight the benefits and considerations associated with these retirement options.

1. Develop a Written Plan Document

To establish a money purchase/profit sharing plan, employers must begin by creating a written plan document. This document outlines the provisions and rules of the plan, including eligibility requirements, contribution limits, and vesting schedules. It must be distributed to all employees, ensuring that they are informed about the plan and its relevant details in a language they can understand. The plan document serves as a blueprint for the administration and operation of the retirement plan.

2. Understand Funding Requirements

Money purchase plans are characterized by defined contributions, unlike defined benefit plans that offer predetermined retirement benefits. However, they share similar minimum funding requirements with defined benefit plans. Employers need to comply with the funding requirements outlined in Section 412, which provides details on the minimum contributions necessary to ensure the plan's financial stability. It is essential to consult with a financial professional or legal advisor to ensure compliance with these regulations.

3. Establishing Deadlines

Employers must establish money purchase/profit sharing plans by December 31 of the year for which contributions will be made. Since the contributions in these plans come from the employer, there is a time frame of at least eight months in the following year to meet the funding requirements. Adhering to these deadlines is crucial to avoid potential penalties and maintain compliance with retirement plan regulations.

4. Consider Prototype Plans

To simplify the process of establishing a money purchase/profit sharing plan, employers can consider utilizing prototype plans. These plans, such as 401(k)s that include money purchase or profit sharing components, have already undergone thorough scrutiny for compliance with tax codes and employment regulations. By opting for a prototype plan, employers can leverage pre-existing structures and documentation, reducing the time and effort required to set up the retirement plan.

5. Seek Expert Assistance

Creating and managing a money purchase/profit sharing plan can be complex and time-consuming. To navigate this process effectively, employers should consider engaging the services of financial companies specializing in retirement plan design. These professionals can help design customized plans that align with the employer's goals and provide ongoing support in maintaining compliance with evolving legislative changes. Additionally, they can handle administrative tasks such as filing the Form 5500 on behalf of the employer, alleviating some of the administrative burdens associated with retirement plans.

Summary

Like other qualified plans, these need a written plan document and investments to fund. A written plan document must be established and distributed to all employees notifying them of the plan and of all pertinent details, in language they can understand.

Plans must be established by December 31 of the year for which contributions will be made, and, since the contributions come from the employer for both of these, the employer has at least 8 months of the following year to meet funding requirements.

Money Purchase plans are pensions with defined contributions rather than defined benefits, but they have minimum funding requirements just like defined benefit plans. Section 412 contains more details about minimum funding requirements.

To learn more information about the difference, see “What’s the Difference between a Defined Benefit Plan and a Defined Contribution Plan?”

Employers can use prototype plans, such 401(k)s that include money purchase or profit sharing plans, which have already been scrutinized for compliance with all applicable tax code and employment regulations.

The financial companies that design such plans and package them for employers will update the plan language to reflect legislative changes, and may even file the Form 5500 (found here) for the employer, which can be cumbersome.

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